Time to glean profits from grains

Time to glean profits from grains ETF SecuritiesTime to glean profits from grains

Time to glean profits from grains, by Aneeka Gupta, Associate Director of Research

The 2018 price gains staged by wheat, corn and soybeans of 18%, 14% and 6% respectively (as of 18 May 2018), display a turnaround in the grains market that has, in the recent past, been plagued by weak prices due to rising inventories. In its first outlook for the 2018/19 (September/August) cycle, released on 10 May 2018, the US Department of Agriculture (USDA) was optimistic in its outlook for the grains market and this positive tone has recently been resonated in the futures market, with speculative positioning rising to its highest level since August 2017, according to commodity and futures trading commission data. Here’s a closer look at key agricultural commodity projections and the implications for investors.

Figure 1: Net positioning across grains turns positive

Source: USDA, Bloomberg, ETF Securities. Past performance is not indicative of future results. You cannot invest directly in an Index.

Corn deficit

In the case of corn, USDA estimated a further deficit of 35.8 million tons on the global market in 2018/19. If realised, this would be the lowest level of corn ending stocks since the 2012/13 season, as demand is expected to outpace the expected production increase. With oil prices surging higher, more corn is being used for fuel production than traditional feed purposes in 2018, due to the price incentives offered by cheaper corn-based ethanol.

Lower projected yields and harvested acreage are expected to be a drag on the US crop, resulting in an estimated decline of nearly 600 million bushels from the previous harvest. However, combined corn exports from Ukraine and Russia in 2018/19 worth 265 million bushels are likely to increase competition for the US. The reduction in corn cultivation in China, after it already cut back its stocks in 2016/17 and 2017/18, is likely to contribute to a more pronounced decrease in global corn stocks.

Based on USDA’s projections, the decline in world corn ending stocks puts the world stocks-to-usage ratio at 14.5%, compared to 21.8% last year. This would mark the second-tightest world stocks-to-usage ratio for corn since the 1973/74 season, rendering the new corn crop vulnerable to adverse weather conditions. Corn prices are trading at historically low levels relative to the stocks-to-usage ratio and given that corn prices are known to exhibit the most pronounced negative correlation (0.55) to the stocks-to-usage ratio among all grains, we expect to see a significant catch up in corn prices, similar to that witnessed in 2010. However, as corn enters the prime growing season of June to September, it remains exposed to significant price pressure.

The latest USDA crop progress report showed this spring’s corn planting pace improving to 62%, close to the five-year average of 63%. Corn emergence also advanced to 28% as of mid-May, in line with the five-year average of 27%.

Figure 2: Corn prices lag tightening stocks-to-usage ratio

Source: USDA, Bloomberg, ETFSecurities. Past performance is not indicative of future results. You cannot invest directly in an Index.

Soybean plantings to exceed corn plantings

Low agricultural commodity prices are resulting in a paradigm shift in the US towards increased production of soybeans in lieu of resource-intensive corn and wheat. USDA expects soybean plantings to exceed corn plantings in 2018 by the greatest level ever. Despite USDA projecting global soybean production to rise on the back of a recovery from the drought in Argentina, higher soybean crush and exports are expected to offset most of the rise, with global soybean ending stock estimates declining by 5.5 million tons.

After the announcement of punitive tariffs on US soybean imports by China, China’s 2018/19 soybean imports are projected to decline for the first time in 15 years. At the same time, China’s soybean acreage is set to be expanded by around 9%, according to sources from the Chinese Ministry of Agriculture. While this will contribute to production, China will only be producing approximately 12% of the amount of soybeans it consumes. Considering China’s rising soybean demand, we do not expect the current developments to interfere with the country’s import requirements and expect to see a resolution to the ongoing trade disputes.

Figure 3: Soybeans ending stocks

Source: USDA, Bloomberg, ETFSecurities. Past performance is not indicative of future results. You cannot invest directly in an Index.

Tough conditions for winter wheat

Wheat remained the weak link in USDA’s latest report. Since the start of 2018, a large part of wheat’s upward price momentum can be attributed to reports of tough conditions for winter wheat crop in Kansas, the most important US growing state, and other key regions. As it stands, 50% of Kansas winter wheat, 68% of Oklahoma winter wheat and 60% of Texas winter wheat is in poor or very poor condition. Planting progress shows winter wheat was 36% headed, falling behind the five-year average pace of 41%. However, USDA surprised investors by projecting a 5% increase in US wheat production due to a strong rise in spring wheat, despite poor winter wheat conditions.

Despite the 15% decline projected for Russian wheat crop, global wheat stocks are expected to be only 2% short of the 2017/18 all-time high. However, world ending stocks for 2018/19 are estimated to be lower at 955 million bushels, a positive development, which if realised would mark a four-year low.

How to gain exposure to agricultural commodities

Due to the strong performance of the grains market in 2018, the Continuous Commodity Futures Price Index (CCI Index), which has a high allocation to grains and agricultural commodities (47%), has risen 3.27% (as of 18 May 2018).

The distinctive feature of the CCI Index is its lower volatility, relative to other commodity indices, due to its lower weighting to the volatile energy sector. Additionally, index positions gravitate towards the near six months of the forward curve, thereby reducing volatility and mitigating negative roll yield. Unlike the major commodity indices, the CCI Index rebalances daily to keep weightings constant.

Figure 4: Cumulative contribution to spot return – year to date

Source: USDA, Bloomberg, ETF Securities. Past performance is not indicative of future results. You cannot invest directly in an Index.

Positive contributors to the spot return this year have been energy, grains and cocoa, as per the chart. For investors looking to gain exposure to grains and agricultural commodities, the CCI Index offers diversified exposure to commodities while maintaining a tilt to grain and agricultural commodities.

Related products

  • + ETFS 1x Daily Short Grains
  • + ETFS 2x Daily Long Grain

Aneeka Gupta, Equity & Commodities Strategist at ETF Securities

Aneeka Gupta is an Equity & Commodities Strategist at ETF Securities. Aneeka has 10 years of experience working as a Research Analyst across a wide range of asset classes. In her current role she is responsible for conducting analysis for all in-house commodity and macro publications and assisting the sales team with client queries around products and markets. Prior to ETF Securities, Aneeka worked as an Equity Sales Trader at Sunrise Brokers across US and Pan European Exchanges. Before that she worked as an Equity Derivatives Sales Manager at Mashreq Bank in Dubai.

Aneeka holds a Bsc in Mathematics from the University of Delhi and a Masters in Mathematics from Oxford University and is also a CFA Charterholder.


This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

US planting responds to price signals

US planting responds to price signals

US planting of wheat and corn are down as weak prices deter farmers. Soybean and cotton planting rise as US farmers hope to continue last year’s increase in exports. The latest USDA Prospective Planting report shows that farmers are responding to price signals from last year. Wheat planting is down 8% to the lowest level since records began in 1919. Corn planting is expected to be down 4%. Both of these crops saw record high output last season, which sent wheat and corn prices tumbling 18% and 17% since June 2016. However, to move prices meaningfully higher, other countries will have to restrain planting and the gains in yields we have seen in recent years will have to abate. Soybean on the other hand is expected to see a 7% rise in planting this season. Last year, a poor South American crop increased demand for US soybean and lent support to its price. US soybean exports rose 4.5% in 2016/17. Although prices have eased in the past month, US farmers are hoping to take further market share this season. Cotton planting is expected to rise by 21%. That comes as cotton prices have increased 28% in the past year and US exports rose 44% in 2016/17. Cotton has been in a supply deficit for the past two years and US farmers appear to be banking on continued tightness. However, global cotton inventories ex-China have not fallen and remain around the average in the past 10 years. China’s surplus inventory has been declining as the country abandoned it stockpiling programme in 2014. However, China’s imports of cotton may remain restrictive. US farmers will have to rely on growth in imports elsewhere to absorb potential increased production.
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Nitesh Shah, Research Analyst at ETF Securities

Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).

Global Recovery to Drive Cyclical Assets

Global Recovery to Drive Cyclical Assets


Cyclical assets will give the best investment opportunities in 2015 on the back of the increasing momentum of the global economic recovery. While the recovery will be led by the US and emerging Asia, it will be gradual and not likely to be a straight line. Numerous risks remain, particularly the growth and deflation threats for the Eurozone and Japan, alongside the fading economic momentum in the UK economy. Accordingly, those commodities and currencies poised to benefit from US and Chinese growth are likely to be the main beneficiaries in 2015. Our favoured assets are cyclical commodities like industrial metals and energy and the US Dollar.

Continued economic growth to support cyclical commodities demand. Cyclical commodities are likely to be the main beneficiaries of continued economic growth in US and China in 2015. With China continuing to stimulate its economy and budgeting for more commodity-intensive infrastructure spending we believe the outlook for cyclical commodities looks strong. Local governments in China were reluctant to make large spending decisions in 2014 because of the central government’s clampdown on the use of third-party funding vehicles. Now that local governments are able to borrow under their own name, we believe commodity-intensive infrastructure spending will accelerate in 2015. Commodity performance has lagged traditional economic activity indicators like the US leading index amongst others, and we expect this to mean revert.

Supply likely to become constrained if price weakness persists. With so many commodities trading at or below their marginal cost of production, we believe that unless we see price increases, production will be cut. While in the short-term companies and mines can continue to produce even if prices are trading below marginal costs, it is not sustainable in the long-term. Unprofitable operations will have to be shut down or downsized, reducing production to contain costs. In turn, tighter supply will drive better price performance. We expect the recent correction in commodity prices to be transitory and believe commodities are attractively valued at current levels. Most of the factors that have hit commodity prices over the past months are temporary, and we believe the price correction creates tremendous opportunities for medium to long-term investors.

Geopolitical risk – a double-edged sword. While the geopolitical environment remains tense in a number of regions, and likely to weigh on the economic outlook, it is likely to be a supportive influence for a number of commodities. Demand for defensive assets like gold, primarily as a portfolio hedge will likely remain resilient, especially with the price of this hedge so close to the marginal cost of production. In our central scenario, we don’t expect geopolitical risk to significantly interfere with continued economic growth and the demand for cyclical assets. At the same time, geopolitical risks could cause supply disruptions across a number of commodities.

Supply disruptions key for industrial metals. While supply remains abundant across most commodity sectors, contributing to price weakness, we feel that the most aggressive supply forecasts have been priced in. Supply shocks have played a central role in the metal space this year, with South Africa suffering a 5-month long strike and Indonesia introducing an ore export ban. Significant production is located in emerging markets, which makes supply consistency an ongoing uncertainty.

Industrial metal and precious metal markets should also benefit from continued growth in Chinese demand (we feel that the negativity over a Chinese slowdown is overdone), and supply not achieving growth expectations of the market. Supply disruptions are quite common in the commodity space and they are likely to continue to be a key driver of prices in 2015. As noted above, a worsening geopolitical outlook could also moderate some of the supply expectations for commodities, particularly in the energy and metals sectors, helping lift prices in 2015. The recent price weakness reflects transitory investor capitulation and we believe that a broad range of commodity markets appear attractively priced, particularly those linked to a cyclical upswing.

Modest tightening of oil supply expected. While there appears to be a clear split between Gulf OPEC members and the remaining countries in terms of cutting oil production to sustain oil prices, we expect the OPEC oil cartel will eventually commit to cutting back on oil production.

With the majority of OPEC countries estimated to require oil prices of above US$90-US$100/barrel to balance their government budgets, it is a matter of time before OPEC start to reduce supply and that could happen as early as November 27, when OPEC holds its next meeting. While US production is abundant, with oil production at multi-decade highs there is little potential for US crude exports in the near-term, capping the negative impact the over-supply in the US has on global prices.

Agricultural outlook remains varied and tied to weather. The fortunes of the agricultural sector are clearly significantly tied to weather. With an El Niño weather event forecast for the Northern Hemisphere winter, we could see further gains in coffee, sugar, wheat and a decline in soybean prices. Hot, dry weather in the major producing areas of Brazil, Australia and Asia typically hurts coffee, sugar and wheat growing, while soybean growing typically prospers under wetter conditions in parts of South America. Other weather-related disruptions could also cause sizable price movements in corn in 2015 given that perfect growing conditions have been priced in to this years crop.

Gold likely to sustain modest gains. The outlook for the gold price is especially uncertain. Ordinarily, a positive economic environment, in which some major central banks will likely raise interest rates, will be a gold negative scenario. However, there are a number of events which could drive a surprise increase in the price. The potential passage of the Swiss gold referendum at the end of the month was once thought of as a tail-risk. However, with polls indicating 38% of the Swiss population in favour of the central bank holding 20% of its assets in gold, that risk is rising. Should the proposal pass, the central bank would need to increase its current holdings of gold from 8% to 20% over a span of 5 years, which would lend support to the gold market. We believe the expansionary monetary policy of the ECB and BOJ to also prompt demand for gold from investors in these regions as low or negative deposit rates increase the appeal of holding gold. The accompanying weakening of the euro and yen will also boost returns of foreign investors holding dollar denominated assets. In general, we expect gold to end 2015 in the range of US$1250-1300/oz, as long as US interest rate rises are modest and gradual.

Central banks’ action key for currencies in 2015. The global interest rate cycle is turning. Interest rates in many developed economies have been hovering near their lowest levels in recorded history for nearly six years. In our view, as economic momentum gathers pace, interest rate settings will be adjusted higher toward historically normal levels.

While the global economic recovery is taking hold to varying degrees across the world, there has been a divergent trend in developed economies. These differences mean central bank policies will also diverge, providing opportunities for currency investors and investors exposed to assets that are not priced in their home currency. We believe continued improvements in the US economy will see the Fed being the first central bank to raise interest rates in 2015 toward historically more normal levels. The flattening of the US Treasury curve is likely to prompt broad-based strength of the US Dollar over the course of 2015. While the UK showed early signs of a robust recovery in 2014, momentum has faded in recent months, with manufacturing activity and household sector spending posting downside surprises. We expect the differential of US over UK bond rates to continue to widen as investors begin to factor in better US growth rates, putting further downward pressure on the GBP/USD exchange rate. At the same time, weakening growth has seen Eurozone inflation hovering less than a quarter of the ECB’s ‘below, but close to, 2%’ target for several months.

As deflationary threats have mounted, the ECB has been aggressive in introducing fresh unconditional policy measures, including negative deposit rates and additional long term funding and asset purchasing initiatives. The new measures, which are aimed at increasing lending and liquidity conditions in the real economy, are likely to remain in place in for the foreseeable future. We expect the aggressive ECB stimulus to continue to weigh on the performance of the Euro, as we do not expect the economic situation to improve markedly over the coming year. With latest data showing that the Japanese economy is in a recession, we anticipate the BOJ adding further stimulus in 2015 (a similar situation to the ECB), keeping the Japanese Yen depressed in 2015.

We expect commodity currencies to perform well in 2015, as one source of weakness (depressed global commodity prices) begins to fade. We feel that as oil prices begin to rebound the Norwegian Krone and the Canadian dollar will appear particularly attractive against funding currencies like the Yen and the Euro. In addition, the Canadian dollar has the benefit of strong economic ties to the strengthening US economy – another source of support for the currency.

US Dollar strength is no threat to commodities. The historically negative correlation between the US Dollar and commodity prices has been a headwind for commodity price, particularly gold, at the margin. We expect this relationship to decouple moving into 2015 as the global economic recovery gains pace. The US Dollar strength in 2014 has been the result of the brightening US economic environment and the increasing potential for the Fed to tighten policy in 2015. We expect this ‘positive’ US Dollar strength to continue but the improving economic backdrop is likely to supportive for underlying commodity demand, especially with Chinese demand also remaining healthy. Accordingly we foresee an environment In 2015 that is beneficial for both the US Dollar and commodity prices.



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